Federal Reserve Eyes End of Bond Buying, Spooking Markets

Federal Reserve Chairman Ben Bernanke said the central bank could start winding down its $85 billion-a-month bond-buying program later this year and end it altogether by mid-2014, setting up a high-stakes test to see if the economy and financial markets can begin to stand on their own.

Financial markets—which have been enlivened by the fuel of the Fed’s easy-money policies—didn’t take the news happily. The Dow Jones Industrial Average finished the day down 206.04, or 1.35%, at 15112.19. Yields on 10-year Treasury notes jumped 0.126 percentage point to 2.308%, the highest level since March 2012. The dollar strengthened.

Behind the Fed’s strategy for unwinding its bond-buying program were its optimistic new economic forecasts for next year, including a projection that the jobless rate, which was 7.6% in May, will fall to between 6.5% and 6.8% by the end of 2014.

The Fed hasn’t yet made a formal decision to end the bond-buying program, and Mr. Bernanke in a press conference following the Fed’s two-day policy meeting emphasized that the central bank will be flexible as it assesses the economy’s health. The Fed’s bond-buying programs are meant to drive down borrowing costs, push up asset prices and encourage more investment, spending and hiring in the broader economy.

But Mr. Bernanke said the wind-down could begin “later this year” if growth picks up as the Fed projects, unemployment comes down, and inflation moves closer to the central bank’s 2% target. If those expectations bear out, the Fed could stop buying bonds altogether by the middle of next year, when officials project unemployment to be around 7%, he said. Read More

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